David Blunkett resigned as Work and Pensions Secretary today, bowing to pressure over his business dealings.
Downing Street insisted he had not been fired but reached his own decision that his position had become "untenable".
An hour after Mr Blunkett's decision to leave the Cabinet for the second time in less than a year, Mr Blair announced his departure to MPs in the Commons at question time.
He said: "I would like to say that whatever mistakes my Right Honourable Friend has made, I have always believed and believe now he is a decent and honourable man."
He defended his decision not to sack Mr Blunkett over his failure to consult an independent committee about three jobs he took up after leaving Government last December.
Mr Blair said he had investigated the matter and "I could discover no impropriety".
He said there had been "a frenzy" surrounding Mr Blunkett which made it impossible for him to continue.
"He goes, in my view, with no stain of impropriety against him whatsoever," said Mr Blair.
Tory leader Michael Howard said Mr Blair had not only lost a Cabinet ally "but lost his authority".
Mr Blunkett's resignation was announced at 11am after he had two meetings in No 10 with Mr Blair this morning.
The Sheffield Brightside MP was due to explain his decision at a press conference scheduled for 12.45 today.
More on this story in Thursday's Birmingham Post